Indy Explains: Wholesale electric markets, and how they could affect your power bill
As Nevada policy makers continue to grapple with critical questions ahead of a 2018 ballot measure that could fundamentally alter the state’s energy market, a commission is taking up an issue that could have a huge effect on residential power bills: wholesale electric markets.
Discussion on what to do with wholesale markets — broadly defined as the buying and selling of electricity between the point of generation and the end customer — dominated a large part of Tuesday’s meeting of the Governor’s Committee on Energy Choice, a 25-member panel composed of legislators, business representatives and other interested parties and chaired by Lt. Gov. Mark Hutchison.
The success or failure of state leaders to implement a system that allows for new retail providers — the companies that all Nevadans will begin purchasing power from if the ballot question passes — to purchase inexpensive wholesale power will have a significant effect on individual power bills.
And unlike almost every other state that has implemented retail choice, state lawmakers will likely only have three opportunities to prepare for energy choice: the 2019, 2021 and 2023 legislative sessions, if the measure passes the 2018 ballot. The task? Figure out the best way to restructure the state’s energy market before the constitutionally mandated deadline of July 1, 2023 to switch over to an open, competitive market.
Depending on the choices lawmakers make, power customers could potentially be on the hook to help pay off millions or even billions of dollars in transition costs to a new system operator that would oversee the new market, as well as any costs associated with divesting power plants and other NV Energy utilities.
What is a wholesale energy market?
Traditionally, the energy industry has been vertically integrated with generation, transmission and final sales to retail and business customers all being under the same roof.
But as energy markets have become more decentralized, “wholesale” markets have begun to emerge in several states, not just those that have embraced a retail restructuring. Broadly speaking, energy is considered “wholesale” when its ownership changes hands before the final transaction between a provider and the end consumer (that final transaction is considered the retail market).
Wholesale markets are typically laid on top of “Interconnection” areas (broken up into the West, East and Texas) that connect local power grids with limited transfers of power between them. Nevada is part of the Western Interconnection, which consists of 37 balancing authorities — entities charged with managing the operations of electric systems and ensuring that supply and demand of electricity are generally kept even. Most states (including Nevada) use their primary electric utility function as the balancing authority.
The bodies charged with overseeing those markets typically take the form of Regional Transmission Organizations (RTOs) and Independent System Operators (ISOs). Outside of a few minor differences, the terms RTO and ISO are largely used interchangeably. Currently, nine ISOs operate in the U.S. and Canada, but the only one operating near Nevada is California ISO (CAISO), which serves Nevada’s western neighbor and parts of Nye County that are serviced by the Valley Electric Association.
These oversight entities essentially operate as a central clearinghouse for transactions in transmission and generation of electricity, as opposed to direct agreements made between generators and wholesale electric sellers.
Every ISO/RTO is structured to accommodate the particular demands of the state or region that it covers, and no two are exactly alike. Though no states that have transitioned to a competitive retail market have done so without a corresponding wholesale market, there are several ISOs/RTOs made up of traditional utilities that decided to form collective market operators in order to spread out potential supply and demand.
Nevada is technically already involved in a wholesale energy market, in the sense that the state’s primary main utility — NV Energy — engages in the selling and buying power at competitive rates across state lines. The state joined the Western Energy Imbalance Market (run by CAISO) in 2015, a bulk power market that allows participating utilities and entities in eight states to buy and sell electricity closer to the time it’s actually consumed.
The market allows states that have overproduced electricity or have a sudden spike in demand to find readily accessible users to whom they can offload energy or sources from which to purchase energy.
Why are Nevada policy makers interested in wholesale markets?
The Energy Choice Initiative ballot question is set up in such a way that it will likely require the state to either expand, create or join into an existing ISO to more fully serve retail energy suppliers, who are looking for the most cost-effective ways to procure electricity and sell it to customers.
The state currently benefits from membership in the Western Energy Imbalance market, which for example allows Nevada (and other states) to cheaply purchase oversupplied solar power produced by solar facilities in California during times of peak solar production — typically in the early afternoon.
But that market only serves energy needs in the immediate short term, whereas other ISOs/RTOs offer options for a day-ahead market, enabling participants to buy or sell electricity a day ahead of planned use. NV Energy Director of Market Operations Lauren Rosenblatt told the commission on Tuesday that creation of such a “day ahead” market would help future retail sellers of electricity find affordable, suitable sources of power.
“In order for the retail providers to provide choice, they also need choice in purchasing their supply,” she said.
Renewable energy advocates also support the creation of an ISO or RTO in western states, given several reports that indicate “clean” energy is better integrated into such markets because it’s transferred over a larger geographic area and can be better matched with larger markets given the intermittent nature of resources such as solar or wind.
What are Nevada’s options to join wholesale markets?
Topic areas for the commission to tackle over the next eight months include five possible wholesale market structures, including:
- Existing Structure: Keep the state’s existing bilateral market with open access transmission service.
- Nevada Power Exchange: Similar to the above option, but with an independent facilitator overseeing the bilateral market with an open access transmission service.
- Contracting out: Come to an agreement with California’s ISO or another nearby ISO/RTO to serve as the contracted operator for a Nevada-based ISO while continuing to use the Energy Imbalance Market.
- Expanded relationship with California: Expand the existing Energy Imbalance Market to include the day-ahead market.
- Nevada centralized market: State would independently form its own ISO/RTO with transmission services.
Although state leaders have been skeptical about joining up with California’s wholesale market in the past because of concerns that Nevada could be at the mercy of the much larger state’s whims and desires, California ISO President and CEO Steve Berberich said that joining the market would solve a lot of upcoming problems.
“You have a lot to deal with,” he said on Monday. “We already have a wholesale market. You could take that issue off of your table.”
Who makes the decision to join a wholesale market?
Though the Governor’s Committee on Energy Choice is taking the lead on providing recommendations for a future restructured market, it will ultimately issue just that — recommendations.
A final decision on wholesale markets, as well as other rules regarding retail suppliers and regulatory oversight, will ultimately be the responsibility of the state’s part-time Legislature.
In addition to the commission, state lawmakers approved a bill during the 2017 session requiring the Legislative Committee on Energy — which meets between sessions — to conduct its own study focused on energy choice. Though the topic matters are similar, Democratic Assemblyman Chris Brooks said in April that the two committees wouldn’t be duplicative.
How much will it cost?
A Nevada-specific ISO would likely prove costly — Berberich estimated that the technology needed to run the system, costs to comply with hundreds of regulations, and the resources needed to track individual consumers as they switch power companies will be extremely expensive.
“I’m here to tell you that starting up your own ISO could cost you half a billion dollars,” Berberich said.
That figure is an outlier and dependent on the state deciding to start its own independent ISO, which appears unlikely to happen. Because most existing ISOs/RTOs were formed in the 1990s over a period of time that included both day-ahead and real time imbalance markets, it is difficult to assess exact costs in establishing an ISO or RTO in today’s wholesale markets.
In 2004, the Federal Energy Regulatory Commission issued a report attempting to assess how much a new ISO/RTO would cost for just real-time markets — not day-ahead markets or the creation of a system operator to oversee the market. Though the report is more than a decade old, it estimated the cost to be well over $100 million.
Berberich said that Texas spent roughly $600 million setting up their ISO, and California spent roughly $200 million when it went live in 2009. And those costs are again just estimates, as most of the individual functions of wholesale markets were added piece by piece over a period of time.
Costs would largely depend on what steps Nevada leaders decide to take — merely purchasing a suite of software or contracting out services to an outside state or party would have a substantially different cost than building a system from the ground up.
How does it affect consumers?
Although several commission members brought up the issue of effect on ratepayers, including newly appointed Nevada State Consumer Advocate Ernest Figueroa, the commission decided to whittle down the possibilities before assessing the cost to the consumer.
Again, one of the largest questions facing the commission and state leaders is how to pay for the transition costs into the new system should the ballot measure pass again in 2018. It’s possible electric customers could be on the hook for billions of dollars in existing NV Energy generation assets and power purchase agreements that the utility will need to divest, as well as any costs associated with developing and putting necessary regulations in place for a new wholesale and retail market.
The clock is ticking.
Updated at 2:35 p.m. to clarify the cost of setting up and ISO/RTO in California and Texas.